Homework Answers
Answer:
Step 1 : Calculation of Earning after Tax before Depreciation
| Particulars | Year 1 $ | Year 2 $ | Year 3 $ |
| Sales | 1680.00 | 2001.00 | 2135.00 |
| Cost of Sales | (890.00) | (920.00) | (998.00) |
| Gross Profit | 790.00 | 1081.00 | 1137.00 |
| Operational Expenses | (489.00 ) | (541.00) | (632.00) |
| Depreciation | (70.00) | (73.00) | (77.00) |
| Operating Profit | 231.00 | 467.00 | 428.00 |
| Financial Expenses |
=(13% x 639.00 ) = (83.07) |
= (13% x 642.00 ) = (83.46) |
= (13% x 763 ) = (99.19) |
| EBT | 147.93 | 383.54 | 328.81 |
| Taxes @ 30% | (44.38) | (115.06 ) | (98.64 ) |
| Net Profit | 103.55 | 268.48 | 230.17 |
| Add: Depreciation | 70.00 | 73.00 | 77.00 |
|
Add: Tax shield on Cost of Debt 30% on Financial Expenses |
24.92 | 25.04 | 29.76 |
| Earnings after Tax before Depreciation | 198.47 | 366.52 | 336.93 |
Step 2 : Calculation of Earnings on Equity by using CAPM Model
| Particulars | Year 1 | Year 2 | Year 3 |
| Expected Market Return | 25% | 26% | 27% |
| Risk Free Return | 3% | 3.5% | 4% |
| Beta | 0.92 | 0.92 | 0.92 |
| Earnings on Equity by using CAPM Model |
= 3% + 0.92 x ( 25% - 3% ) = 23.24% |
= 3.5% + 0.92 x ( 26% - 3.5% ) = 24.20% |
= 4% + 0.92 x ( 27% - 4% ) = 25.16% |
Step 3 : Calculation on Return on Capital Employed :
Year 1 = [23.24% x 780 / ( 780+ 639 ) + 13 x ( 1- 30%)% x 639 / (780+639 ) ] x (780+639 ) = 239.42
Year 2 =[ 24.20% x 830 / (830 + 642 ) + 13% x (1-30% )x 642 / ( 830+642 ) ] x ( 830+642 ) = 259.28
Year 3 = [25.16% x 878 / ( 878+763 ) + 13% x ( 1-30% ) x 763 / (878+763 ) ] x ( 878+763 ) = 290.34
Step 4 : Calculation of EVA
EVA = Earnings after tax before depreciation - Return on capital employed
Year 1 : 198.47 - 239.42 = -40.95
Year 2 : 366.52 - 259.28 = 107.24
Year 3 :336.93 - 290.34 = 46.59
Profitability on Earnings on
Owner's Perspective :
Year 1 : 198.47 / 780 x 100 = 25.44%
Year 2:366.52 / 830 x 100 = 44.16%
Year 3: 336.93 / 878 x 100 = 38.37%
Asset's Perspective :
Year 1 :198.47 /1639 x 100 = 12.11%
Year 2 :366.52/1630 x 100 = 22.49%
Year 3:336.93/1876 x 100 = 17.96%
Recommendations for the Company :
1. Purchase Asset at beginning of the year for taking benefit of Depreciation in earlier years to increase overall earnings
2. Try to increase sales to increase in profit margin which can be used to purchase assets and pay of loans
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